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Finding the “HIDDEN VALUE” in a business With more “smokestack” industries moving off-shore and more service type businesses appearing every day, the pricing of businesses becomes increasingly complex.An in-house survey of over 100 recent business sales showed that, on average, “intangibles” accounted for almost 72% of the sale price. What are intangibles? They are any asset which is not physical in nature as opposed to stock and plant and equipment. Generally, they do not appear on the Balance Sheet and are often under-valued and under-recognised. They can include such intellectual property as trademarks, domain names, patents, copyrights, and trade secrets. They can also include written contracts, e.g. franchise agreements, leases and supply / service / employment contracts. They can be relationships – with customers, clients, staff and databases. And they can be general goodwill. Intangibles are major value drivers for businesses but difficult to measure and appraise. The challenge for the business owner is to identify them, appraise them, protect them, and make them as transferable as possible. Capturing intellectual capital in manuals, formalising contracts, and registering tradenames etc. can increase value significantly. That’s one reason franchises attract higher prices than independents. Intangibles can also affect price in the business sales process, e.g. non-compete undertakings, training and transition provisions, and vendor finance. Sound business planning will recognise intangibles may be more important than physical assets and focus on maximising their transferability. |
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